Don’t worry about ‘Brexit’ causing a crash in sterling, falling stock prices, and the relegation of the UK to Europe’s second tier. According to a group of esteemed economists surveyed by the Financial Times, Britain will not leave the European Union because it would be… bad for Britain.
That’s right! The FT surveys more than 100 economists at the end of each year. This year, 67 of the economists surveyed said Britain’s economic situation would deteriorate if voters decide to leave the EU. Not a single one thought a ‘leave’ vote would enhance Britain’s economic growth or national security.
Neville Hill of Credit Suisse seemed to speak for the 67 when he said that a vote to leave “could well be the catalytic event that turns the UK’s current account deficit from a ‘something to worry about’ to ‘a problem’.” That “problem” is that capital would flee the UK and sterling would crash based on the uncertainty of what a ‘leave’ vote would do the British economy.
It’s not a trifling worry
A capital exodus wouldn’t just trigger a sterling crash. It might trigger a property crash. Without large flows of foreign capital into London’s property market, the game could be up for property. Then again, a sterling crash would make British property prices a lot cheaper to foreigners.
I asked Charlie Morris about the conundrum. He wrote back:
“A record current account deficit will lead to a crash in sterling whether we stay or go. If we go and sterling crashes, people will blame BREXIT. If we stay and sterling crashes, people will blame the EU.
“Following a sterling crash, the current account deficit will recover because we will import less and, possibly, export more. Also foreign income will be worth more in GBP terms and outgoings will be lesser. This has already happened right across the Eurozone since 2008.
“Pretty much every EU nation now has a surplus following the euro crisis. France has a modest deficit, so does Finland. Eastern Europe, including Turkey, have large deficits. Our current account deficit is in large part, because of the euro zone. It will be interesting addressing these issues over the next few months.”
Charlie’s response was much more considered than my initial response. Casting aspersions or making ad hominem attacks on the wisdom of economists is the low road. But it is oh so tempting, isn’t it? The entire economics profession remains in disrepute after its failure to anticipate or even understand the credit bubble that blew up in 2008
The credibility problem of economists doesn’t make them automatically wrong about what would happen if Britain left the EU. But consider the source. When you’re trapped in a bubble of conventional thinking, and you have a vested interest in staying on the easy money/big government/big bank gravy train, anything that threatens that is… threatening.
Category: Brexit